Assets pour into bank accounts, GICs

“There is an unbelievable amount of risk aversion,” Tal says, suggesting that the percentage increase of bank account and GIC assets has probably reached double digits since August.

Joe Canavan, chairman of Toronto-based Assante Corp. agrees. “This is the most challenging, gut-wrenching time I have ever seen in financial markets,” he says. “A lot of people are extremely frightened. The severity of the correction — its viciousness and velocity — is unparalleled.”

Although much of the cash appears headed for bank deposits and other conservative investments, Canavan says, he has heard stories of people becoming so fearful that they take money out of banks: “Heading for the mattress or the can at the back of the freezer.”

The mutual fund industry is probably the source of much of the cash finding its way into deposit accounts and other conservative investments. The investment equivalent of a frigid winter has already gripped funds — and the mercury keeps dropping.

According to the Investment Funds Institute of Canada, the industry saw total net fund redemptions of $4.5 billion in September, a sharp swing from $800 million in net sales a month earlier in August, and almost $1 billon in net sales in September 2007.

Money market funds led the retreat in September, with net redemptions of $2.5 billion. Equity funds followed, with redemptions of $992 million; balanced funds lost ground to the tune of $862 million.

One bright spot was fund-of-funds products, which have held up much better with relatively insignificant net redemptions of $90.3 million. “Our portfolio solutions have held up quite well and are showing strength in these markets,” says Chris Dotson, head of communications for RBC Global Asset Management in Vancouver.

At RBC, a lot of the money market fund redemptions are finding their way into GICs offered through the parent bank’s branch network, Dotson says, partly because clients have been attracted by promotional rates. For example, Royal Bank of Canada is offering 4.25% a year on two-year GICs and 4.5% a year on four-year GICs.

In fact, IFIC’s September report cites rising rates on short-term investments as one of the reasons for the draining of money market funds, as well as a lack of differentiation on the part of inves-tors between Canadian funds and the troubled money market funds domiciled in the U.S. (The U.S. Treasury has stepped in to guarantee U.S. money market funds temporarily against losses of up to US$50 billion, after funds with exposure to the debt of Lehman Brothers Holdings Inc. and other troubled companies dropped in value and triggered a run of redemptions.)

Canavan says clients who are liquidating stocks and mutual funds are heading for the safety of GICs and deposits. With the collapse of some U.S. financial services institutions, they are seeking security.

“People are moving from weaker institutions to the major banks,” Canavan says. “They want certainty that the institution will survive. Even if there is [Canada Deposit Insurance Corp. coverage] at some small financial institution, you’d have to litigate to get it.

“Some clients are putting cash toward debt repayment,” he adds. “By paying down their mortgage or other debts, they feel they are in a less vulnerable position, particularly if things get worse. It’s a time for fiscal prudence.”

Assante’s clients are also finding comfort in equity products with lock-in features and guarantees, including segregated funds and seg funds with guaranteed minimum withdrawal benefits, Canavan says. Assets in GMWB plans have grown to more that $5 billion since Manulife Financial Corp. introduced the first GMWB product in Canada in 2006.

Mackenzie Financial Corp., Bank of Montreal and IA Clarington Investments Inc., all of Toronto, offer “target date” funds with guarantees on high-water mark values, and they are seeing positive inflows into these specialized fund families even during the worst days of market turmoil. (See page 34.)

@page_break@”The target-click funds are one of the few funds in our lineup to see positive inflows in this environment,” says Eric Frape, IA’s senior vice president, product and business development. “The guaranteed values on the funds, regardless of what happens to the market value, are a huge comfort to clients.”

A popular option for those seeking CDIC insurance, liquidity and a better return than common savings accounts are high-interest savings accounts — typically offering rates of about 3% — with on-demand withdrawals. For example, Dundee Bank of Canada, a subsidiary of Toronto-based Bank of Nova Scotia, reports that as of Sept. 30, assets in its new Dundee Investment Savings Account, available only through advisors, have increased by 62% to $3.4 billion from $2.1 billion a year ago.

“When volatility is up, people cash out and sit on the sidelines,” says Fay Freiman, vice president of marketing for Dundee Bank.

Toronto-based Manulife Bank is also experiencing healthy double-digit growth rates, with a 32% increase in its savings account assets, which ballooned to $7.9 billion in August 2008 from $6 billion in August 2007. This figure does not include fixed-term deposits.

“Our demand deposits at Manulife Bank have gained significantly due to the popularity of our high-interest investment savings account,” says Tom Nunn, assistant vice president of communications for Manulife.

Although it’s understandable that some investors are bailing out of the stock market, given its volatility, Tal offers a warning to those on the sidelines. Clients who sit on their cash for extended periods could end up missing the upside when the market does eventually recover. He says investors sat on cash for three to four years in 1987 although markets returned to pre-crash levels by 1989, and for about two to three years in 2001.

“When you lock in for one year, you might miss the boat,” Tal says. “The first leg of the rebound is most significant.”

As investing guru Warren Buffett wrote recently: “If you wait for the robins, spring will be over.” IE